To: Dave B who wrote (2911 ) 6/4/2003 10:14:28 PM From: w0z Read Replies (3) | Respond to "As opposed to your statement that "P/S is always listed as a key valuation metric", in reality it was rarely listed as a valuation metric before the mid 90s." "Let me try it this way. You, Duke and I all own local 7-11s, all with $10M per year in sales. We simultaneously decide to sell our stores. Who's going to get more for their business -- you with $1M/year in profits, Duke with $50K/year in profits, or me with $1M/year in losses? Certainly we're not going to get the same price for our stores. The person who buys your store can expect to take home $1M per year right off the bat. You'd get quite a bit for a $1M profit stream. Duke's going to get less because $50K isn't very exciting -- a lot of reasonably educated people could do better by working a regular job and not working 16 hours per day. Finally, I'm going to get very little for mine. The person who buys mine will have to keep funnelling more money into it. Only an idiot would pay the same price to me that you get." potential of a business. In your example, I would buy yours for a fraction of mine, and implement identical management practices that allow mine to earn $1M per year. If you sold it for a fraction of mine, you are giving away the potential $1M earnings power that should exist under proper management (i.e. if one store can earn $1M on $10M in sales, it should be possible for others to do the same). P/E is a metric of what is and P/S is a metric of what could be . Of course I would not tell you that when I was negotiating with you to buy your store! ;-)
